Covid-19 and the regulated sector


At a glance

Anybody reading this, if they were used to a desk job or a trading screen in a bank or other institution, is likely to be working from home. And will be likely to remain away from their regular office haunts for perhaps some weeks.

So what in brief are we seeing in the regulated sector? What are the immediate effects and what it this unprecedented situation storing up for the future? Partner and Head of Financial Regulation Daniel Tunkel provides a summary.

Business continuity

Well, for a start, this development is going to test the robustness of the business continuity plans of a great many firms, great and small. Every firm the FCA regulates is supposed to have a continuity plan to deal with such eventualities. One is given to wondering just how robust these will all prove to be. The three core questions that need to be clearly answered by a competent plan are, surely:

(1). Can the firm marshal the repayment of all client funds it it had to?

(2). Are client assets safe?

(3). Are there proper and effective channels of communication to all clients (remembering that most of them will be at home too)?

There will be other issues concerning systems and controls, capacity to supervise returns to the Regulator, capacity to evaluate and clear conflicts etc. Of course this is just level one, in the sense that everyone is offsite but still well. Things will become greatly more complicated when employees and seniors in a firm start to take ill themselves, or are pressed to look after children or the elderly in place of schools and day centres that have now closed. Make no mistake:  this is going to be a rough ride, and those continuity plans could very likely all do with a spring clean, however robust you think they are.

Credit default

A slightly different tack. It looks to be largely inevitable that the entire world will now topple into recession, and possibly as prolonged an experience as 10 years ago with the Financial Crisis. Recessions are times of business failure and that means, among other things, credit default – on a possibly massive scale.

Regulated sector businesses who are credit lenders or credit brokers, perhaps specifically including those in the P2P market, will need to very carefully consider if they can expect (or compel) their borrowers to repay loans with interest. If not, how are they themselves going to cope with their own lenders? This is also going to be very tricky to manage where it transpires that the given firm’s credit risk modeling made assumptions that were nowhere near defensive enough to address this new crisis.

It would be instructive for banks (especially the hardly tried and tested challenger banks) to be telling the market that they have matters in hand – even if this draws on further liquidity lines from the Bank of England. And sad though it is to say, it is not unlikely we shall see more failures among the P2P platforms in the next few months. Money at a P2P platform is not, of course, protected as deposited cash: if the platform fails, there’s no route to claim losses from the FSCS.


One last quick theme for now. It is not going to be straightforward to get identification documents certified by a lawyer or accountant. Client ontake still requires identification and proof of (bona fide) source of funds. Of late, many new systems for inviolable personal identification have started to enter the market. Expect these, regardless of development and management cost, to now really come into their own. Expect pressure on regulators or even legislators to officially sanction this change.

We wish all our clients and friends the very best as they navigate through these disturbingly choppy waters, and we are here to help address any issues that may arise.

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Daniel Tunkel

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